The truth about log book loans
You're behind with your council tax or the washing machine has just packed in and you need cash fast.
Suddenly, your vehicle, parked just outside in the street, grabs your attention. I wonder... hmmm. Yes you can, you can often raise cash against your vehicle.
Every year thousands of vehicle owners turn to companies to raise finance against their car or motorbike in an arrangements commonly referred to as a log book loan. But are they any good?
A log book loan, secured against your vehicle, can range from £500 to £50,000 depending on the value of the vehicle in question. Having a log book loan means that you will lose your vehicle if you default on the repayments to the loan company.
So what’s so attractive about this type of loan? For many people it’s that they are available irrespective of their credit history.
To qualify for the loan you have to be over 18 and be the legal owner of a vehicle with a current certificate of insurance, a valid MOT if more than three years old, a current tax disc and which has no or very little finance outstanding on it.
Once these criteria are met and as long as you can demonstrate how you mean to repay the loan it’s time to hand over the registration certificate, formerly known as the log book. This is a document unique to each and every vehicle and without it you cannot sell a vehicle.
Along with a credit agreement you will then be asked to sign a bill of sale, which temporarily hands over ownership of the vehicle to the loan company and gives them the right to repossess the vehicle in the event of you defaulting on your repayments.
The standard term for a log book loan is 58 weeks although you may be able to pay it off earlier. Since the annual percentage rate (APR) can be high it is advisable to pay it off as quickly as possible.
The APR includes the interest rate you pay, how you repay the loan, the length of the loan agreement, the frequency and timing of payments and the amount of each payment, and finally, the fees associated with the loan.
By law, lenders must tell you what their APR is before you sign an agreement and it is important to remember that it can vary from lender to lender.
Don’t make the mistake a client of mine did a few years ago when he went to the lender with the highest APR because he thought it was a ranking guide as to the quality of the firm!
For the record, the lower the APR the cheaper the loan will be for you. The typical APR for a log book loan is 437.4%.
With this typical APR, if you borrowed £1,500 and paid £53.60 a week for 78 weeks, you would repay a total of £4,180.80. Although you could pay considerably less if you repay early, so long as their is no early repayment fee.
How they work:
Once the deal is done, how do you get paid?
Usually it is by cheque which takes several days to clear although some firms offer a quick cash service, but can charge as much as 4% in fees for this option.
How much can I borrow against the vehicle?
This will obviously depend on what the lender values your vehicle at. They will usually ask you to take it to an agent, in a location of your choice, together with the relevant documentation to confirm what they are prepared to lend. Even if the vehicle has existing finance against it, it is possible to account for this when they make their offer.
If you take up a log book loan it is important to remember that while you keep your car, the lender will keep your log book until you have repaid the loan.
Disadvantages of a log book loan:
- A very high APR, possibly as much as 437.4%, making it a very expensive form of borrowing
- The debt quickly escalates out of control if you start to fall behind with the payments
- You could lose your car or motorbike if you fail to keep up the payments on the loan
- No credit check
- Available to those with an impaired credit history
- Depending on which firm you use funds can be available immediately
- No restriction on what the money can be used for
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.